Expert: Jim Avancena, CPM - 4/2/2008

Question
QUESTION: We lease one building in a set of 3 commercial buildings.  Our landlord occupies the other 2 buildings.  The parking area is bounded by a railroad tie wall in one portion of one side.  The railroad ties were deteriorating and needed to be replaced.  Is this expense normally considered a common-area-maintenance expense?

ANSWER: Elaine,

You have an interesting question which may require further information to answer with any accuracy.

The first part of the information required to help you involves your lease.  Unfortunately, like so many of the endless variety of repairs that are CAM expenses, your CAM provision in your lease likely does not specifically specify how "Railroad Tie" wall repairs are to be handled.   

Does the text of your CAM provision discuss whether "capital expenditures" are acceptable for your landlord to include as part of reimbursable CAM expense?  Because some or all of the decaying railroad ties will need to be replaced now or within the next few years, the cost of replacing them all or a significant section of them will likely be substantial.   The replacement materials, excavation of the old materials, preparation of the ground for the new installation of railroad ties and their placement is a big job.

I don't know when the old railroad ties wall was put in, but it has likely been several or many years.   Since the original wall took an extended number of years until it needed the up coming replacement, the railroad tie wall has what is known by accountants as a "useful life" of more than one year, perhaps five to fifteen years of service until it needs to be replaced.   Any constructed project like the wall that lasts for any amount of time of longer than one year is considered a "capital expenditure" and not a "repair".  The cost of repairs are normally included in CAM expense, however, capital expenditures should not be included as CAM expenses UNLESS YOUR CAM PROVISION SPECIFICALLY STATES THAT THEY CAN BE INCLUDED. If nothing is indicated in the text about capital expenditures, then they should not be included.

Even if the language of your lease specifically allows your landlord to include capital expenditures as reimbursable CAM expense, the FULL AMOUNT of each capital expenditure is not included in the total to be reimbursed for the year the expenditure was made.   For example, if the new railroad tie wall project will last for 10 years; that is, the new wall has a "useful life" of ten (10) years; your landlord can include one-tenth (1/10th)of the total cost of the project in each consecutive year CAM total following the completion of the new wall.  If you are not certain what the correct "useful life" is for different types of replacements or major repairs, you can contact the Internal Revenue Service who can tell you where you can find their lists and suggestions regarding the timeframe that should be applied for hundreds of types of projects, etc.   You can also contact an accountant because they will usually have good information on appropriate useful life periods to apply.

Remember, some lease CAM provisions allow a landlord to include capital expenditures in their reimbursable CAM charges assessed to their tenants.  Most do not.  You must read your lease carefully to determine what is allowed to be included in your CAM provision.

Furthermore, be sure to check to see if their is any methodology or reasonable rationale for the tenants of your building having to pay perhaps all or none of the railroad tie replacement project.  Let me explain this comment.

If there are three buildings and one third of the wall closest to the first of the three buildings constructed was installed then, then perhaps only the tenants in the first building should pay for the replacement of the wall ties.  This means that when the portion of the wall that is closest to your third building is replaced, that you should be prepared to pay for your buildings wall project also -when the time comes.

You will have to think this through on your own since you are familiar with the three building project.  

If you end up getting involved with all the fine details on how all the component costs were assembled to result in the total which forms the basis of your ratable share of the CAM expenses, you will need to be very organized and specific about questioning the landlord about the derivation of the bill he sends you for CAM costs.  You may need to ask him for the "supporting information" prepared and used by his accountants (or his bookkeeper) that show all of the component calculations made that show how all the many component expenses fit together into a complicated group of calculations that result in the charge that you received.  Reviewing the supporting information is a big job for a trained accountant to pick apart and understand, and for you it will be very challenging.  If your landlord or his bookkeeper say that don't have that information, I would be concerned that there may be more problems than just your railroad tie concerns with your CAM bill.

Your goal in the process of establishing what is "fair" for your landlord to assess to you as a CAM expense is primarily determined by a close reading of your lease provision that describes what your landlord can allocate to you for reimbursement.  However, many times the text is insufficient to settle a dispute as to what is fair. Faced with ambiguity, often the most reasonable way to determine what is appropriate to be assessed as a CAM expense can be found in past expense records.  If your CAM expenses seem to be unreasonably high, and may include excessive CAM expense, review the CAM expenses for recent calendar year periods when the CAM assessments where lower, to see if the unusual type of costs that were included in the current years' bill, have been included in the past.  If the cost has not been included in past years CAM allocations, there is a fair chance that the new expenditures are improper.  Most, but not all,  CAM expenses are recurring costs.  Ask you landlord to explain his rationale for including the new types of cost starting this year.  

You should know that most tenants are intimidated by their landlord and are too fearful to challenge their landlord over the basis of their CAM charges.  This is the primary reason many landlords collect charges that they are not entitled to year after year.  Those tenants that do challenge their landlord over CAM charges find they receive very spirited responses by their landlord in these matters. If you are analytical regarding the landlords' responsive materials, you may find many inconsistencies in the process.  

I may have given you more information that you wanted to describe my answer to your question.  Please send another, more specific question if I can assist you any further in this regard.

Good luck.

-Jim Avancena

---------- FOLLOW-UP ----------

QUESTION: Thanks for your quick response.  I think I understand everything.  It seems to me that the repair of the wall is not a recurring maintenance expense.  It is the original wall that was built over 30 years ago.  It probably will not need to be replaced for another 30 years.  Our landlord is not trying to cheat us.  He just doesn't understand what is or is not an allowable maintenance charge.  Last year, he paid an attorney to have the real estate tax bill reduced on the buildings.  He tried to bill us for "our share" of the attorney's fees until I pointed out to him that this wasn't an expense that he was allowed to pass on to his tenants as a CAM bill.

ANSWER: Elaine:

You seem to be learning quickly!

I am certain you have read all the fine print in your lease by now so you know if your landlord actually has the right to charge you for the legal fees regarding the tax reduction effort.

For your information, most leases contain a provision addressing what the landlord's rights are regarding challenging tax assessments and whether or not the landlord can pass those costs on to his tenants as a reimbursement charge.   In some jurisdictions it is quite possible to be successful in a tax challenge provided your representative has a solid case for a reduction.

If the attorney's challenge is successful and the tax bill is reduced for the property -  and depending upon HOW MUCH the bill was reduced -  it actually can benefit both the tenant and the landlord to keep the taxes as low as possible -  but obviously only if your particular lease requires you to reimburse for real estate tax charges.   In addition to the CAM provision in a lease, some leases will describe such tax reduction efforts and legal fee arrangements in a separate Real Estate Tax provision.  

Finally, it sounds like you have the railroad tie matter well under control.   If you do ever find yourself considering the terms of another lease, be very, very careful about any reimbursement provisions that allow the landlord to assess capital expenditures and mold remediation as tenant reimbursable expenses.   Many new leases disguise capital expenditure costs by describing them with other adjectives. Over the last 10 to 12 years, mold and capital expenses have become a mushrooming problem for unsuspecting tenants as it can often be a much more complicated and expensive costs for most tenants than they suspect.

Let me know if I can help with any other problems.

Good hunting.

-Jim Avancena

---------- FOLLOW-UP ----------

QUESTION: I can't thank you enought for your responses to my concerns!  One last question though:  we've also been charged for our portion of the landlord's assessment fee for repairing the streets in our industrial park.  All of the building owners have been assessed for the repair.  Our lease states that CAM expenses include repairs to the parking lot (but not an overlay of the lot) but it doesn't say anything about repairs to the streets that are common to all of the buildings in the industrial park.  What do you think?

Answer
Elaine:

My initial thought would be that a parking lot is clearly something different from a street.  Repairs to the "Parking Lot" are traditionally a CAM expense and would include pothole repairs, restriping of the parking spaces, the periodic sweeping of the trash in the lot by street sweepers, and usually the lighting.  Remember, we are only considering "repairs" to the parking lot, that is, work that betters the condition of the lot, but does not have a useful life of more than one year.   

Every now and then a certain area of the parking lot surface material may need new "topping"; where a certain thickness of new asphalt is put down and covers all of only a certain portion of the parking lot, it is then rolled and restriped.  I believe such a project is a capital expenditure because that portion of the lot will not need any maintenance work done for several years.  Many landlords claim such work is maintenance work.  

The IRS suggests that if a certain type of major repair work is done to one-fourth of the parking lot each year for four years, that this represents an "on-going" planned capital expenditure in spite of only one-fourth of the overall project being preformed each year.  Many landlords call this a version of "Tax Planning"; by breaking down a major capital expenditure into smaller component parts and calling the smaller annual project a "repair" to the lot instead of a capital expenditure.

If possible, I would ask the public/municipal authorities to provide you details of the scope of the road/parking lot work included in the work done as a result of the assessment and that should give you a better understanding of the work and whether it should be considered "Parking Lot" repairs or road work.  If it involved an assessment, it means it is a public project, and the authorities will readily provide you with the details involved in a public project and its contractual details.  

Remember that you can ask the landlord to tell you when in the past that similar work was done to the parking lot and allocated as a CAM cost.   If it is not a recurring cost on a regular basis, it is likely not a true "maintenance" item.

I hope this allows you to make a decision about the correct allocation of this cost item.

Good luck.

-Jim Avancena